Note: These investment bloopers are true;  identifying information and
situations have been completely changed.

Blooper  #4: Dan and Miranda don’t know how much their broker charges
them each year – and why he’s keen to recommend certain
investments:

Dan and Miranda have $2,000,000 of investment accounts with an advisor. They
don’t know anything about  A, B and C mutual funds – they don’t pay attention to
the “A,” “B” or “C” alongside the name of each mutual fund holdings. Their
broker invested $500,000 in “A” shares – these generated  up to $28,750 (5.75%)
in front-end commissions to the broker (note: fees were deducted from Dan and
Miranda’s initial pool of funds – they weren’t aware the initial $500,000 seed
money began at $473,750 because of the 5.75% front-end loads). Their broker
invested another $500,000 in “B” shares – they didn’t know B shares have a
surrender penalty so they’re stuck another 3 years and can’t move out of these
investments without penalty. Finally, their broker put the $1,000,000 balance in
”C” shares – these pay  $10,000 each year to their broker (1% fee on $1,000,000
- again, fees are deducted from their net return so they don’t see or feel
them).

Conclusion: Pay attention to “A,” “B” and “C” designations mutual funds. Make
sure you understand what they cost you – brokers say they explain fees to
clients but this couple has no memory of having these explained to them.
Unfortunately, confusion about fees is very typical.

Blooper #3:  Jerry has variable annuities he wasn’t aware he
owns:

Jerry has IRA accounts with a friendly advisor who sells products. Jerry told
the advisor he was worried about outliving his retirement assets. The advisor
agreed to “help provide a comfortable retirement” and explained these
investments are “safe.” Jerry didn’t really understand what he was signing but
he trusted his advisor.

When Jerry engaged an independent advisor to review his investments, he was horrified to discover he had purchased  variable
annuities with surrender penalties!  The advisor who sold these to Jerry did NOT
tell Jerry she earned a tidy $8,000 in commissions by putting him into $200,000
of variable annuities (4% commission on $200,000 = $8,000) and did NOT tell
Jerry these annuities would cost him 3% per year in fees that are deducted from
his investment return (= $6,000 per year on $200,000 – deducted from his
return).

Conclusion: Jerry was advised by his new independent advisor Jerry to exit
these variable annuities when the surrender penalty ends in 2014. Once he
unwinds these annuities in 2014, his funds remain in his IRA but now Jerry has
access to low-cost investment alternatives.

Blooper #2: Susan ended up in a hedge fund she doesn’t
understand:

Susan’s brother, a Fee-Only Certified Financial Planner® took a look at her
brokerage statement and discovered Susan had 25% of her investment portfolio in
an obscure hedge fund that has declined by more than 1/3 vs. her initial
purchase price. Susan will retire in 5 years – the broker obviously didn’t pay
attention to Susan’s comments that she can’t stomach much investment risk.

Conclusion: Susan confirmed this investment is free of surrender penalties;
she has decided to cut her losses due to the high risk. Since this position is
in a taxable account, Susan can “harvest” the investment loss (use it to offset
capital gains elsewhere — or carry over $3,000/year for the rest of her life).
If Susan retained this fund in her IRA, she would consider the pros and cons of
selling in consultation with an independent investment advisor.

Blooper #1:  Janice and Bill don’t know what their ideal portfolio
should be (e.g. 40% stocks, 60% bonds/cash) and they don’t know how their
current portfolio is positioned:

Broker XYZ  provided Janice and Bill with a patchwork of various investments.
They don’t understand what they’re invested in, and don’t know if their
portfolio is too risky for them.  Janice checks the value on statements each
month and is pleased if the portfolio is “up” for the month. She trusts Broker
XYZ to handle things.

Conclusion: Janice and Bill had a Fee-Only financial advisor review their
existing holdings, determine their risk tolerance, determine the kind of
portfolio that best funds their financial goals, weeds out inappropriate
investments and gets them on the right portfolio track. The advisor periodically
rebalances their investments so they stay on track.

Are you experiencing any of these investment bloopers? Get a 2nd opinion from
a knowledgeable financial advisor who doesn’t mix products with advice – a
Fee-Only advisor!

Copyright (C) 2012 by Eve Kaplan

How do you decide if it makes sense to leave a job and become a stay-at-home parent? As a financial planner, I approach this topic strictly from the financial standpoint – I’m NOT saying it’s better be a stay-at-home Mom and I’m NOT saying it’s better to use child care and go to work.

For the record, I’ve been both a stay-at-home Mom and a working parent. Any parent will tell you being a stay-at-home IS a job – it’s just not a paid job.

What prompts me to look at this topic is a recent CNN Money article (4/18/12) titled “Moms: “I can’t afford to work.”
The article catalogues the rising cost of child care that eats into – or even exceeds – the take-home pay of working parents (in this case, a working mother). The Bureau of Statistics data underscore some of the underlying issues for stay-at-home Moms:

a) Although women exceed men in terms of educational attainment, their average income is $35,776/year.

b) $35,776/year is nearly 20% less than the average income earned by men.

Rising child care expenses present a heavy drag on family finances, but the CNN Money article overly simplifies the
decision one mother made (a Mrs. Hwang) because it merely compares the cost of child care for her children vs. the after-tax income she could otherwise earn. Clearly there are many ways to value of a job — and after-tax pay is only one of them.

Mrs. Hwang is a good stand-in for any stay-at-home parent. She related to CNN that her public school teacher salary
was $30,000/year after tax. She has 2 children and the cost of care for them is a relatively “modest” $18,000/year (the article notes she lives in Virginia, which has some of the lowest child care expenses in the nation). Mrs. Hwang felt it wasn’t worth it to continue work, although her husband can’t earn enough for them to live comfortably.

For the sake of argument, let’s say her child care expenses total $30,000 per year – the same as her after-tax take-home salary. And let’s assume Mrs. Hwang elects not to return to work, even after her children leave for college. On that basis, let’s compare ALL
components of her income to make a fair analysis of the “cost” of being a stay-at-home Mom – not just a flat comparison of a) child care costs vs b) after-tax salary:

1) As a public school teacher, each year of teaching accrues toward a retirement pension that pays Mrs. Hwang from retirement to the end of her life. Let’s assume her pension does not inflate once retirement commences (this is ine line with Gov Christie’s decision to freeze teacher and administrator pensions for decades to come). If Mrs. Hwang is 38 and chose to work to age 65+, she can accrue a lifetime pension that I calculate pays her at least $40,000/year (after tax) from 2039 (age 65) to the end of her life. This is a conservativeestimate based upon projected income levels and pension accrual. The value of this estimated
pension from age 65 to age 92 is $1,080,000 in 2039 dollars, or $554,000 in 2012 dollars.

2) Mrs. Hwang’s future social security payments would be higher if she continues to work since income generation drives projected social security benefits. After consulting with a number of specialists, potential “game changers” in social security render
calculations too tentative. However, one projection I ran indicated Mrs. Hwang could receive approx. $18,600 per year in retirement (agg 67 to the end of life) if she works, but only half that amount per year if she remains a stay-at-home parent (note: this does not include some build up in credits for work done from e.g. age 30-38). Since social security works like an inflating
fixed annuity, missed dollars obviously have an impact on Mrs. Hwang’s cash flow through her projected 25+ years of retirement.

3) Mrs. Hwang’s presumably has medical coverage through her husband’s job. It’s possible, however, that medical coverage through school would cost significantly less – possibly $6,000/year less (2012 dollars). Again, I use public schools teachers in NJ as an example since teachers here still benefit from generous subsidies for medical coverage.

4) Mrs. Hwang will miss access to a tax-deferred 403b savings plan through work. It’s not likely she has a match for her deferred savings, however, and it IS possible she could defer $5,000 per year in a spousal IRA, so the cost/benefit calculation here is a wash.

5) Mrs. Hwang will forego e.g. 1x salary life insurance available through work by staying at home. If she’s in good health, that benefit is worth at least $100/year.

6) Since Mrs. Hwang is a school teacher who presumably does not work in the summer, it’s possible her child care costs
may be less than a working parent who has the standard 2-3 weeks of vacation/year.

What is the effective value of work benefits Mrs. Hwang is giving up, apart from her income? In current 2012 dollars, it easily exceeds $700,000 over her lifetime. It’s possible the value Mrs. Hwang and her family assign to staying home with her children is “priceless,” but it’s also possible the Hwangs aren’t aware of the long-term cost of her decision to leave work. Either
way, the “cost”calculation of leaving work must include many benefits that aren’t immediately apparent when looking at take-home pay alone and comparing it with child care costs. Of course we haven’t discussed working parents who
work awhile, stop to raise children, and return to work thereafter. And we’re not addressing the benefits of staying “current” in a competitive work landscape. Like other decisions, there are both emotional and financial costs and benefits.

What’s the right answer for you and your family? I posit that a financial advisor provides meaningful input by running numbers to calculate the effective cost (or savings) if you decide to become a stay-at-home parent or if you’re thinking about returning to work.

At the very least, the cost/savings equation needs to include many more elements than just a flat comparison of “child care costs” vs. “take-home salary.” A good advisor can help you make a more informed decisions so you and your family avoid outliving your assets.

Copyright (C) 2012 by Eve Kaplan

That is no reason to put off making a plan. If there is no plan, they risk frustration and failure to fulfill dreams. There is no worse sentiment than regret. The question is: What kind of future do you really want for yourself and the people in your life that are most important to you?

An April 9 Wall Street Journal article (“He Wants to Retire…but She Doesn’t”), cites a study by Fidelity Investments to highlight the problems of making a plan. Couples disagree on when to retire (62%), whether to keep working in retirement (47%) and on lifestyle expectations (33%).

A plan enables a couple to evaluate the costs of various wish lists and select strategies that satisfy both husbands and wives. A neutral party, their financial advisor, provides the forum for an open and non-judgmental discussion, then weighs in with numbers to aid the decision making.

Like a car trip, your financial life is a journey that needs to be navigated carefully. After a financial advisor checks your entire car to make sure it will withstand the journey, the advisor creates a GPS system for you to help you stay on track.
Here’s a specific example, gleaned from hundreds of clients I’ve worked with from my office in New Jersey. Judy and Bill are in their late 50s, have grown children and are looking to retire in the next 10 years. They’ve never worked with a financial advisor before. They disagree on retirement expectations. When they visit me, we have an open discussion.

Bill dislikes his job and wants to retire “yesterday.” He’s willing to work to age 63, but wants to winter in a warmer climate. Judy enjoys work and wants to continue her current job into her late 60s, assuming her health and employer permit it. After retirement, she may consider spending part of a year in a warmer climate if it makes financial sense. Judy and Bill agree on other goals – such as the amount of money they’d like to spend on their daughter’s wedding, their annual travel budget and the need for long-term care insurance.

Can they afford to allow Bill to retire at 63, and to purchase a place in a warm climate? Or does it make sense to rent? How do they negotiate emotionally and financially negotiate staying in New Jersey if Judy wants to retire after Bill?

A good financial plan creates decision trees that show Judy and Bill that some preferences, such as buying a condo in a warm place now, probably aren’t financially prudent. A plan also helps Judy and Bill avoid costly decisions they may regret later. For example, how should Bill structure his pension payout to make sure Judy receives something if he dies prematurely? Should they consider long-term care insurance? If so, what is the best kind? What kind of estate planning should they do?

A good financial plan will bend to Judy and Bill’s wishes, but guide them toward choices that have the best possible financial outcome. Their destination on their financial road map is making it to the end, comfortably, with money to spare.

My role is to give them the best road trip instructions possible, consider the right fuel (restructure their investments), offer estate planning advice, minimize taxes and consider insurance alternatives. I do this by consulting trusted professionals I work with, like an insurance agent.

In the end, it’s all about making sure you design a trip that makes sense – and gets you safely to your destination.

Copyright © 2012 by Eve Kaplan

Can you answer these questions?

• What are the differences amongst brokers, insurance agents selling investment products and “financial advisors” (some regulated, some not)?
• What’s the difference between “fee-only” and “fee-based”? (hint: they sound alike but they’re quite different)..

Here’s a brief guide to help untangle these concepts:

1. Brokers and insurance agents:

Brokers and insurance agents can and do sell financial products (A, B and C mutual funds, annuities, variable life insurance, annuities). Their standard of fiduciary care is a “suitability” standard. This lower standard of care means they can benefit more from product sales than the client -  as long as their products are very broadly considered to be “suitable,” they’re OK to sell.

2. Advisors and financial planners:

This term is confusingly broad – some advisors have no designation, while others can be a CFA, CFP®, ChFC® and/or CPA/PFS. These designations are the ones most acknowledged in the financials industry – they all require study, passage of exams and adherence to standards of oversight. For the purposes of this discussion about compensation, I’ll focus on financial advisors who interact with the general public and who either:
a) Sell products or
b) Don’t sell products

Advisors who sell products can hold any of the above- mentioned designations. They can include fee-based advisors; although they sound like fee-only advisors, “fee-based” advisors DO sell products. Fee-based compensation is popular because advisors can earn compensation from fees paid directly by clients PLUS fees theyr receive in the form of commissions or discounts from products they’re licensed to sell. They are not required to inform their clients in detail how their compensation is accrued. The Fee-Based model creates many potential conflicts of interest, because the advisor’s income is affected by the financial products that the client selects.

Fee-Only advisors, by contrast, do NOT sell any financial products. If their clients need products (e.g. insurance), they work with professionals they trust but there is no fee-splitting or other inducement involved in the sale of products. Fee-Only advisors typically charge a % of investments they manage and/or charge in some other way for their time (hourly, retainer, etc). Conflicts of interest are kept to a minimum with this kind of fee structure.

Conclusion: the Critical Issue of Fiduciary Standards

An advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with clients because he/she is required to act with undivided loyalty to the client.  This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

If your advisor DOES sell products, it’s hard to know if your needs are deemed more important than his/her needs to earn commission. Is it really better for you to buy a mutual fund with a 5.75% front-end load (commission) from your broker, than a mutual fund with no up-front commission?  Are you getting sufficient services from this broker to compensate for fees you may not even be aware you’re paying because they’re automatically deducted at the point of sale? Is it really better for you to tie up your money in an annuity that charges 3-4% per year vs. putting your money into mutual funds that cost 1/10 that amount? Time and again studies show that clients can be poorly served when product sales commingle with investment management and/or financial planning.

Here’s a common example I see in my practice – I’ll meet a prospective client who has multiple variable annuities. I’m told the advisor wants this client to terminate his 401(k) plan and convert his account to yet another annuity. Or I’m told an advisor wants to convert one annuity to another annuity so he/she can earn a fresh commission. 99% of the time I can see these annuities were NOT helpful to the client, who typically is unclear about the carrying costs and isn’t even sure why he has all of these annuities. What IS clear is that each agent earned a generous commission selling them.  Suze Orman has railed against them (google her on YouTube and listen to her advice to folks to stay away from variable annuities).

A better way to receive investment advice, management and financial planning is to work with professionals who are required to put YOUR needs before THEIR needs. These individuals adhere to the highest standard of Fiduciary can and do NOT combine product sales with advice-giving. The best examples are Fee-Only financial advisors and CPA/PFS individuals who clearly indicate they are Fee-Only.

Yes, Virginia – it really does matter how your advisor is paid.

Here’s an example of the kind of Fiduciary Oath your advisor should adhere to (see www.napfa.org):
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.
The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.

WHO IS A FIDUCIARY?

Type of Professional                                  Are They A Fiduciary?

Lawyers                                                                   Yes

Physicians                                                               Yes

CPAs                                                                         Yes

Stock Broker                                                           No

Insurance Agent                                                     No

Registered Representative                                    No

CFP Practitioner                                                    Maybe*

Financial Planner                                                  Maybe*

NAFPA-Registered Financial Advisor              Yes

*Advisors who are affiliated with a broker dealer firm are most likely not fiduciaries. If the client signs an NASD binding arbitration agreement – required by almost every broker dealer firm – then their advisor would not be held to a Fiduciary Standard by the NASD. CFP Practitioners and Financial Planners will be held to a Fiduciary Standard only if they are also registered investment advisors or associated with a registered investment advisor.

“Can a registered rep and investment advisor rep wear two hats at one time? Can they remove the fiduciary hat once it’s assumed?” asked Thomas Orecchio, NAPFA’s chairman and a longtime advisor based in New Jersey. “Under the current situation, the answer is yes. But the consumer doesn’t know when you’re behaving as an advisor or rep. We believe the advisor can’t take off the advisor hat once it is put on. We think that your fiduciary responsibilities refer to the relationship you create with a client, not any one account or transaction.”

But the Securities and Exchange Commission (SEC) doesn’t agree, saying that reps are investment advisors “solely with respect to certain accounts.” In fact, the NAPFA press conference was held as the SEC advances a controversial proposal pundits say is an end-run around the agency’s loss on the same issue in federal court earlier this year. The SEC lost its push to carve broad exemptions for brokers who were offering “advisory” accounts without registering as advisors.
Now the SEC is attempting to create “special rules” that would once again give brokers exemptions, provided they do not exert discretion over accounts or charge separately for advice. The SEC makes clear, brokers won’t have to register as advisors just because their firm offers full-priced and discount brokerage accounts and fee schedules. At the same time the agency is attempting to clarify limited responsibility for those brokers who do register as investment advisor reps, saying, “A registered broker-dealer is an investment advisor solely with respect to certain accounts.” Both NAPFA and the Financial Planning Association (FPA) filed letters in November criticizing the SEC’s attempted carve outs for brokers.

To illustrate the harm NAPFA believes dually registered advisors can do, the group handed out a narrative story about “Bud,” the dual registrant, and “Mrs. Grant,” who hires him for a financial plan. In the NAPFA story, Bud prepares Mrs. Grant’s plan, but then takes off his advisor hat to sell her a variable annuity and some of his firm’s proprietary funds. “How does this fit in with my plan? Are you still my financial advisor?” Mrs. Grant asks. To which Bud replies: “This fits in just fine. Just trust me. I’ll take care of you.”

“The bottom line is that we’re looking for the fiduciary rule to be applied throughout a relationship with a customer, not be taken on and off like a hat,” said Diahann W. Lassus, chair of NAPFA’s Industry Issues Committee and a veteran advisor in New Jersey. Without fiduciary standards, brokers don’t have to put clients’ interests first, disclose conflicts of interest or charge reasonable fees, NAPFA officials say. “It’s fair to assume as much as 40% of total returns offered by the capital market are being consumed by brokers and other financial intermediaries,” Lassus says.
–Tracey Longo

Copyright © 2012 by Eve Kaplan

The tax guessing game continues because some proposed 2013 tax changes may – or may not –go into effect .  Congress may keep us guessing until the end of this year but it’s clear overall taxes must and will increase.

Uncertainty is the enemy of planning, but here are the most items being “kicked around”:

1. Dividends will be taxed again at ordinary income tax rates after a long hiatus. Out goes the maximum 15% rates, in come ordinary income taxes. Wealthier Americans will pay more since the highest income tax rate is scheduled to rise from 35% to 39.6% in 2013.

2. Long-term capital gains rates will increase to a maximum 20% for most investors (10% for those who are in a 15% tax bracket or lower).

3. The 3.8% Medicare surtax will be levied on income exceeding 250K (married filing jointly; 125K for married filing individually or 200K for an individual tax filer),

4. The federal estate tax exemption exclusion will drop to $1 million (opening many estate planning opportunities in 2012) and

5. The threshold for medical expense deductions in 2013 will increase from 7.5% of adjusted gross income (AGI) to 10% of AGI — unless the taxpayer and his/her spouse turns 65 before the end of the taxable year through 2016.

Here are some strategies to consider for 2012 – bearing in mind the final outcome of tax changes is not yet know. Please note your specific situation may be different:

Dividends and Capital Gains Strategies:

• If you were planning to sell a highly appreciated investment in a taxable account anyway, it’s better to do it in 2012 than 2013. Selling before 12/31/12 locks in your 15% long-term capital gain; waiting until 2013 may cost you 20%.

• If you want to retain a specific mutual fund or stock, you can sell it in 2012 (maximum 15% capital gain) and repurchase it after 30 days to establish a higher basis. Example: you bought  Apple shares in Jan 2010 for $211. Sell them now for $502, pay 15% capital gains tax (=$43.7 per share), and repurchase them for approx. $520.   If you sell this position in 2013 for $600, your gain is $80; with a 20% capital gains tax, your taxes = $16 per share. Waiting to sell your position  $600 in 2013 costs you more:  your taxable gain ($389 per share) = 20% capital gains taxes of $77.8 per share. In this example, waiting to sell until 2013 with a low basis means you end up paying 30% more in taxes.

• On the other hand, consider postponing any sales if you have a large capital loss carryover on investments. Why? The offsetting loss carryover through end 2012 gives you a bigger ”bang for your buck” at higher tax rates.

• Do you have a highly appreciated investment you’d like to gift to family members in a low 10-15% tax bracket (e.g. your children or grandchildren who have little or no income)? If so, 2012 presents an opportunity to have them sell appreciated assets and avoid paying any federal income tax on the gain.

• If you’re retired, in a low 10-15% tax bracket, and can defer income (e.g. an IRA distribution) into the future, you pay 0% on qualified dividends and have no long-term capital gains tax through 12/31/12. Consider repositioning high dividend-earning investments in your taxable account to tax-deferred account – if possible – to lessen your tax burden.

Medical Expense Deductions:

• If you’re considering medical procedures (e.g. dental work) in 2012 or 2013, this year is a better year to do it if you itemize deductions and your unreimbursed medical expenses will exceed 7.5% of adjusted gross income. Proposed 2013 tax changes will not affect the 10% of adjusted gross income threshold for the AMT.

Examples of Other Strategies:

• Some exposure to municipal bonds in after-tax accounts makes sense since your take-home yield may still exceed yields on taxable bonds or taxable bond funds. Municipalities may be forced to pay even higher interest rates to attract investors since Pres. Obama has proposed limiting the tax break for muni bond interest to 29% for couples earning more than 250K/year (single filers: 200K).

• Consider Roth conversions this year instead of 2013. Run numbers to make sure it’s prudent to do this since converted amounts bump up your taxable income.

• Seek out tax-managed mutual funds and funds with relatively low turnover – gains on securities held less than 1 year are taxed at your ordinary income tax rate.  As always, hold high-returning assets with high tax penalties (REITs, junk bonds, commodities) in tax-deferred accounts.

Copyright © 2012 by Eve Kaplan

1. Join my free January workshop to review steps toward financial health. This workshop will be held on Wednesday, January 25 at 7:30 pm at the Berkeley Heights Public Library.

2. Decide if you can get through these “financial health” steps on your own (a minority of folks) or if you need professional support.

Most folks can’t necessarily diagnose and treat their own medical conditions – and the same applies to financial planning.

Here’s an outline of the 12 Step Approach to Financial Health in 2012:

Step 1 (January):  “Paper Chase”
• Create neat, organized files for your insurance, estate planning documents (if you have them), investments (after-tax and tax-deferred), etc.

Step 2 (February): “Location, Location, Location”
• Consolidate your brokerage accounts (12 is not better than 2).
• Consolidate investment accounts by identifying overlapping/redundant investments. I’ll review some resources (e.g. www.morningstar.com) to help in this area.

Step 3 (March): “Follow the Money”
• Add up all monthly or annual income sources (earned income, Social Security/pensions, other income), then deduct all expenses
• Are you in the Red? Black? Did you include mandatory savings if you’re not yet retired?

Step 4 (April):  “Outliving Assets?”
• Add up your assets (property, investments, collectibles)
• Add up your current and future liabilities (mortgages, credit card debt, future obligations [e.g. college, possible support to other family members])
• Do you know if your net worth is sufficient to generate decades of retirement?

Step 5  (May): “Be Credit-Worthy”
• Track your annual credit score
• Consolidate and pay down CC debt in a way that makes sense

Step 6 (June): “Be Tax Savvy”
• Minimize taxes on investments by holding more of some investments in tax-deferred accounts (e.g. real estate, some bonds, commodities)
• Tax harvest before each year end to offset investment gains

Step 7 (July): “Insurance Wrap-Up”
• Do you have the best policies (life, disability, long-term care)to cover what you need  – but don’t cost an arm and a leg?
• Is your family adequately protected from the risk of your unexpected illness or death?

Step 8 (August):  “Sound Retirement Investing”
• Understand and utilize your employer retirement plan
• Roll up and consolidate plans from old employers
• How to utilize your retirement plans before and during retirement

Step 9 (September): “Investment Smarts”
• Know the A, B and Cs of mutual fund investing (different types of commissions)
• Retain more of your hard-earned money by paying a broker less (no more A, B and C charges!)
• Understand simply portfolio diversification techniques

Step 10 (October):  “Estate Planning”
• What are the essential estate documents you need?
• How often should your estate documents be revised?

Step 11 (November):  “Reality Check List”
• Has your financial health improved by taking these steps? Or did you fall off the wagon half-way through?

Step 12 (December): “Putting It All Together”
• Match realistic expectations with results
• Can you go it alone or do you need professional help? How do you find the right advisor for you?

Realistically, the majority of people cannot execute these steps alone. Review this list and see if you fall into that majority group. If you do, consider work with a Fee-Only (no products sold) advisor who will guide you through these steps in an objective manner that doesn’t mix advice with product sales. The right Fee-Only planner will access the situation, provide solutions to close planning gaps and hold you accountable to execute necessary changes.

Copyright © 2012 by Eve Kaplan

This is a subject of wide debate in the financial planning world as our country’s 78 million baby boomers start turning 65 this year. This “withdrawal rate” simply refers to how much you can tap from your investment assets to avoid running out of money before you die. The approach is designed to allow you to withdraw money each year while leaving your principal intact.

For example, if you start with $1,000,000 at retirement and withdraw 4% per year ($40,000), you skim a $40,000 annual gain off the top of your $1 million investment portfolio and always have the $1,000,000 principal until the end of your life. This implies the $1 million keeps growing by 4.2% each year (you need more than a 4% increase to return to $1 million).

Being able to live off interest while retaining your $1 million principal is valuable even if the purchasing power of your principal declines each year with inflation. In other words, your $1 million initial retirement account might only be worth the equivalent of $300,000 after 30 years, but having the equivalent of $300,000 is still a great financial cushion to help keep you from running out of money.

Unfortunately, we don’t live in the predictable world that facilitates an automatic 4% withdrawal rate because markets move up and down, tax rates change, your financial needs change and investments sometimes disappoint. You no longer can simply set the dial at e.g. “4% withdrawal per year” and be assured you won’t run out of money in 30 years.

Here are some things to consider, based upon recent research:

1. People are living longer and longer. It’s not overkill to assume you easily can live another 30 years if you retire at age 65.

2. You can’t control where markets will land the year you retire and begin tapping your investment nest egg.  If you had a few bad years before you turn 65, you might start retirement with $900,000 instead of the $1 million you intended. How much you have at retirement also depends upon your portfolio mix in the years leading up to retirement. You should consult with a financial planner or investment specialist to determine your optimal mix.

3. Once you retire, you need to adjust your withdrawal rate “as you go” – depending upon how markets did the previous 3 years. The Wall Street Journal refers to this strategy as “the accordian strategy.” If the market hits a bear market bottom (note: this may not always be obvious), you trim your withdrawal amount by 25% for the coming 3 years. Michael Kitces, a planning strategist, recommends tracking the S&P 500 P/E (price earnings ratio) to determine if the market is overvalued, fairly valued or undervalued. On that basis, he increases or decreases recommended withdrawal rates within a 4.5% to 5.5% range. This approach has been effective in recent years when tested with a 60% stocks, 40% bonds portfolio.

4. Some specialists recommend an even lower withdrawal rate (as low as 2.5% for a moderately conservative 40% stocks/60% bonds portfolio). This means you withdraw $25,000 per year (2.5%) instead of $40,000 per year (4%). Of course we’re talking about pre-tax amounts.

5. One strategy at retirement is to set aside 3 years of cash reserves (what you otherwise would draw from your investments) so you always can suspend your annual withdrawals from your $1 million if markets hit the skids.

We haven’t discussed the fact that you need to pay taxes on what you withdraw (ordinary income tax rates if it comes from an IRA, or capital gains tax if funds come from an after-tax account). You may need significant other sources of income (social security, pensions, savings) to fund retirement. And then there’s the corrosive power of inflation; you need to withdraw more and more each year in order to keep pace with purchasing power. Finally, our example of $1 million doesn’t go very far toward covering retirement in more expensive parts of the country – you may need multiples of $1 million in addition to social security and a pension (if you’re lucky enough to have one).

As you can see, determining your ideal withdrawal rate is no trivial matter. If you’re calculations indicate you may be coming up “short,” alternatives include retiring later, adjusting your portfolio over time or spending less in retirement. It’s best to seek professional advice if you have doubts or concerns!

Copyright © 2011 by Eve Kaplan

Do you – or someone you know – move in and out of investment holdings in order to “boost your return”? If you do, it’s worth considering the downside. Studies consistently show that market timing (you go into investments when they seem good, exit when they don’t) undermines your ability to make investment progress.

Consider the fact that retail (individual) investors typically flee from markets when the bad news already is reflected in prices, and typically try to climb back in when prices already have moved higher. Instead of buying low, selling high, individual investors tend to do the opposite.

I have an excellent graph that illustrates this point – but I’m not able to overcome technical difficulties and print it here (very irritating!)…so I’ll ask you to use your imagination. As you know, the market fell out of bed in September 2008 (good-bye Lehman Brothers, hello imploding mortgage market). The graph I can’t post shows a steady outflow of individual money in mutual funds as the S&P 500 hit bottom (March 2009) and continued to rise into 2011. As the market is rising, individual investors continue to bail out of stocks.

So who’s driving the market higher? It’s often institutional money (pension funds, professional money managers) who have clients with staying power. This institutional money effectively works to block the natural tendency toward panic selling The proxy for this staying power is Dimensional Fund Advisors but it could be any institutional investor who didn’t try to “market time.” (full disclosure: I use Dimensional Fund Advisors mutual funds for my assets-under-management clients).

Here’s another example of the damage others inflicted on their investment returns when they tried to time markets. Remember the Fidelity Magellan Fund? This fund returned a stellar 29% per year (1977-1990) under Peter Lynch’s tenure but Lynch apparently once said he felt more than half of the Magellan Fund shareholders lost money, based upon fund inflow/outflows. By now you must know the reason why…  Smart money doesn’t exit when the going gets tough – it rides problems out, continues to invest for the future and racks up a better return over time.

Copyright © 2011 by Eve Kaplan

We financial planners wear many hats – problem solver, prudent investment manager, enlightened advisor (helping our clients avoid the risk of outliving their assets), etc. In addition, another hat I wear in my financial planning practice is – for lack of a better word — “money therapist.”

I’m not a licensed therapist, but emotions and money often are tied to each other. If there is discord, misunderstanding or distrust in a relationship, this can show up in financial matters. In meetings with clients, I try to listen well (and talk less). And I’m attentive to both husbands and wives (regardless of who the financial decision-maker is in a relationship). Have you ever met a professional who only looked at you, but ignored your wife or husband through the entire meeting? It’s important to provide a non-judgmental space for both you and your spouse to speak – even if you don’t agree on some issues.

Here’s why this can matter to you:

• money problems/differences is one of the biggest triggers for divorce; money is power
• if you’re emotionally invested in your plan, you’re more motivated to implement it and achieve financial success
• in my experience, women and men often behave differently toward money/financial decisions – it’s helpful to you if your planner reaches out to both the “yin” and “yang.”
• at least half of financial planning clients are women, but only ¼ of Certified Financial Planners® are female

Studies show that women seek out financial advice more than men, while men often view financial planning in more dispassionate terms. Men tend to be more confident about making financial decisions on their own. Drawing on both of these typical gender-linked traits can be a positive for the experience.

How does all of this play out in an initial meeting with clients. In my case, I guide them through a discovery process that gives them time to speak (without interruption from the other spouse) about what’s important to them about money. Often a wife or husband will relay something that prompts the other to say something like “I never knew that about you” or “I’m surprised to hear that – I really had no idea you felt that way.”

When I grew up in the 1960s, financial planning didn’t exist. My family was under stress due to discord over lack of money and problems with a struggling business my father started. My parents eventually got divorced after a prolonged period of financial hell. It’s possible divorce could have been averted if my parents had access to objective financial advice…

A Money Magazine survey indicates that “71% of Americans admit that they keep secrets or lie to spouses and significant others about their money.” If you’re married, you know how intertwined money is in your relationship. Work with a financial planner who can help you sort through issues that help unite you and your spouse, instead of dividing you further.

Copyright © 2011 by Eve Kaplan

By Eve Kaplan, CFP® Practitioner

Like everything else in life, retirement can creep up on you – whether you’re prepared for it or not. It’s wonderful to contemplate what you can do with all that extra free time, how to stay healthy, etc…..but many of you put off the “roll up your sleeves, look at the numbers” part of retirement. Why? You either underestimate how much you need, you don’t know how to calculate it and/or you fail to go to a financial planner for help. Finally, some of you stick your heads in the sand, hoping problems will go away. Establishing your preparedness for retirement is critical since you don’t want to outlive your assets. So far I haven’t met anyone who wants to rely on friends and family for a bail out!

How acute is the lack of retirement preparedness? Very. A recent survey by HRconsulting firm Aon Hewitt says 4 out of 5 Americans are not adequately prepared to meet their needs in retirement. The average worker needs 11x his/her final pay in retirement to meet retirement needs (note: this includes social security). Unfortunately, the average pre-retiree socking away money in defined contribution plans (e.g. 401(k) or 403(b) plans) has far less. Recent market volatility is increasing this gap. Another worrisome trend is the rising number of pre-retirees who have suspended 401(k) contributions and/or no longer receive an employer match.

Esssentially, there’s a mismatch between 1) sources of income and 2) how much folks need in retirement. The resulting gap is the problem. Let’s take a simple look at each area:

Step 1 -Sources of Income: A simple retirement planning is the 3-legged stool. The 3-legged stool refers to the 3 major sources of retirement income: 1) your regular savings 2) your pension (if you have one) – or your 401(k) & other tax-deferred savings plan and 3) social security. You have control over all 3 areas – including how much social security you receive!

1)      How much do you save in after-tax and tax-deferred accounts? Is it the right amount and allocation, given your risk tolerance, savings amounts and investment targets?

2)      Do you plan on taking social security at age 70 (recommended) or will you settle for a much lower annual amount if you rush to take benefits at 62 or 65/66?

Finally – are you planning on retiring at age 60? 65? 70? Phase retirement in steps, if you can? If you end up living to 95 (a growing possibility), will you have enough money coming in each month?

Step 2 – How Much You Need in Retirement: Here’s the other side of the ledger – the amount you need each month or year in retirement, including covering rising medical expenses.

1)      Are your financial goals realistic – given your 3-legged stool? Goals include living expenses, car purchases, travel, insurance and medical.

2)      Can you scale back some of these areas – if needed – to close the gap with your 3-legged stool sources of income?

Outdated financial planning conventional wisdom said folks spent 20% less in retirement. The new, harsh reality is that folks spend up to 120% or more vs. pre-retirement expenses – in part due to rising medical.

Here are the 3 critical steps to eliminate the gap between income and expenses:

1. Retire later
2. Save more
3. Seek professional help (including help with your investments)

We’ll discuss aspects of these 3 critical steps in greater detail in our next blog!

Copyright © 2011 by Eve Kaplan